What the rising dollar means for Australian business: SmartCompany Q&A

Australian entrepreneurs have woken up this morning to news that the Australian dollar is back near US94c thanks to the indication that debt-ridden Greece is set to receive a bailout package from the European Union.

News that Greece will be supported by the EU has had the effect of increasing investor appetite for risky assets, and that means Australia is once again attractive.

This shift back towards risky assets is just one of many factors putting upwards pressure on the Australian dollar. Strong commodity prices, a strong economy and relatively high interest rates are also keeping the dollar buoyant.

But how high can the dollar move? And what will a higher dollar mean for Australian business?

Time for a SmartCompany Q&A.

The dollar really keeps bouncing around. It only seems like a few months ago it was heading back towards US85c.

That’s exactly right. On February 5, the dollar was trading at just over US86c and just over two months later it’s climbed more than 9% to just under US94c.

That’s a big jump in a short time. What’s driving it?

Most recently, interest rates. While the Reserve Bank has increased rates by 50-basis points in the last two months, interest rates in the US and Europe remain firmly on hold and stuck at or close to zero.

It’s little wonder that investors looking for the best places to park their cash are aiming for Australia – and that means the dollar has kept rising.

The recovering global economy, which boosts demand for Australian commodities, is also helping to push the local currency higher.

So given the fact everyone is predicting more interest rate rises and the global recovery is only going to continue, it’s likely the dollar will keep going up, isn’t it?

Most likely, although exactly where the dollar is going to end up is not clear. Economists from Westpac and ANZ both expected the dollar to be at US94c by June, which indicates today’s little jump is unlikely to be a one-off.

But from there they are not tipping that much growth – both have an end-of-year prediction of US95c. Westpac chief economist predict a moderation in commodity prices, a cooling of growth in China and a modest recovery in the US, Europe and Japan.

However, Shane Oliver of AMP Capital Investors believes the rise in the Australian dollar and the weakness of the US dollar suggests parity – where one Australian dollar equals one US dollar – will be tested this year.

Wow. When was the last time that happened?

Not since the 1950s, well before the Australian dollar was floated (that is, the price was set by the market rather than the government) in 1983.

A high dollar is great for shopping on US websites, but I guess it isn’t great for everyone.

No, it’s bad news for exporters. They hate volatility in the dollar (so they are already upset enough about the recent sharp increase) as much as they hate the idea of parity.

In a still-fragile global economy, exporters will find it very tough to raise their prices as the dollar increases, which means they are likely to have to take a hit on margins. That’s not what you want as you’re recovering from a downturn.

Oliver also points out the rising dollar isn’t great news for our wider sharemarket.

“With about 30% of listed company earnings sourced overseas, each 10% rise in the $AUS will mechanically cut earnings by about 3%. Strength in the $AUS is worse for large-cap shares (which have greater foreign exposure) than small caps, which often benefit from cheaper imports.”

Cheap imports. See, it’s not all bad news.

No, there are some winners. Companies that import raw materials or goods for sale will receive a little bit of a kick along. For example, businesses that use oil-based products (fuel, chemicals, plastics) will enjoy some real benefits from a stronger dollar.

And let’s be clear, the rising dollar has most recently been a sign that the Australian economy is doing well, so our businesses and entrepreneurs can definitely handle this.

Okay, so clearly it’s nothing to really panic about.

No. Just be aware of how the dollar might affect your customers and suppliers and your cost base and make adjustments where necessary.

And while the dollar looks to be firmly stuck about US90c at present, be ready for more volatility – that seems to be the only certain thing in the current environment.